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Abstract
This paper analyses CO2 emissions reduction costs based on project data from the Climate Cent Foundation (CCF), a climate policy instrument in Switzerland. Four conclusions are drawn. First, for the projects investigated, the CCF on average pays €63/ton. Due to the Kyoto Protocol, the CCF buys reductions only until 2012. This cut-off increases reported per ton reduction costs, as the additional lifetime project costs are set in relation to reductions only until 2012, rather than to reductions realised over the whole lifetime. Lifetime reduction costs are €45/t. Second, correlation between CCF's payments and lifetime reduction costs per ton is low. Projects with low per ton reduction costs should thus be identified based on lifetime per ton reduction costs. Third, the wide range of project costs per ton observed casts doubts on the widely used identification of the merit order of reduction measures based on average per ton costs for technology types. Finally, the CCF covers only a fraction of additional reduction costs. Decisions to take reduction efforts thus depend on additional, non-observable and/or non-economic motives. Any generalisation of results has to consider that this analysis is based on prospective costs of a sub-sample of projects in Switzerland.
Acknowledgements
The authors wish to thank the Climate Cent Foundation for opening its archives for this study and for the continuous willingness to discuss and answer questions, in particular to Thomas Schmid and Marco Berg. Thanks are also due to Silvia Banfi, Marco Berg, Åsa Löfgren, Armin Schmutzler and Simon Mason for helpful comments. The authors are also grateful to the Climate-L and ResEcon list members who provided some of the literature on CO2 abatement costs. The usual disclaimer applies.
Notes
1. Depending on the type of permit, e.g. differentiated by the delivery period; for data, see the links on www.CO2-handel.de.
2. All monetary values originally given in Swiss Francs CHF were converted to euros, using an exchange rate of €1 ≈ 1.6 CHF.
3. By 15% (3.81 m t CO2) for combustibles and 8% (1.24 m t CO2) for fuels.
4. The current (as of September 2009) tax on gasoline in Switzerland is approximately €0.47/l (CH 2008); the price including the tax is currently approximately €1.00/l, which is lower than in most other European countries; Erdölvereinigung 2009, EC 2008.
5. Project owners calculate additional costs for the whole project lifetime (net present value). They apply for all or a part of this to be funded by the CCF. This is then divided by expected reductions until 2012. This gives the expected per ton price of reductions, which is the basis for the decision of the CCF that then decides to pay the full or only part of the amount required. For more information on the reference scenario, which is needed to calculate reductions and additional costs, see footnote 6.
6. CCF (2006) describes in detail how the emissions and costs for the reference scenario have to be calculated and how the monitoring has to be organised. Standard methods for the project categories (cf. ) and values for key parameters (product life times, emission factors of different fuels, energy prices, etc.) are provided. Based on CCF (2006), new guidelines were developed that apply from 2008 onwards (BAFU 2008); therein, energy prices were updated, for example. Procedures are also geared to procedures from the Clean Development Mechanism. Clearly, the choice of the reference scenario is of paramount importance for the calculation of additional costs, the reductions achieved in a project and its additionality (if the assessment of this is not based on other barriers). The choice of the reference scenario is a complex task and not free of controversies. All values reported in this paper crucially depend on the reference scenarios chosen for the projects under consideration. This paper does not address questions related to the additionality of the projects investigated.
7. The values communicated by the CCF were expert guesses to send some price signal or information on willingness to pay in a situation where no market for permits existed in Switzerland and where the CCF would be the only buyer of permits (personal communication CCF).
8. The imputed project lifetime reported in the PDD. In reality, projects may operate even longer (cf. note ‘Δ’ for ).
9. t-test with the original and weighted data; this result emerges although the means seem quite different at first sight; the results of these t-tests have to be taken with caution as the number of observations are actually too low to reliably apply it: 79, 9 and less observations per group, no knowledge on the distribution and variances.
10. For example, it could happen that certain intermediaries systematically provide projects from a more expensive type, e.g. by being linked to a certain industry. Those could then still be cheaper than without intermediaries but would still be more expensive than other types.
11. Where costs are positive; the mitigation cost curve for the buildings sector has a large part with negative costs.
12. The additionality of the CCF projects was not investigated. There is also the fundamental critique of the CCF that it does not harvest the consumption effect of a policy measure because it does not lead to reductions from emissions in the transport sector, which could be realised with higher mark-ups than 1 eurocent per litre gasoline (e.g. OcCC 2004).
13. This topic is concretely addressed in CCF (2009c), according to which two additional auctions were planned for 2009. They will pay for costs incurred due to emissions reductions from 2009 to 2013. The extension of payments beyond 2012 was decided in order to increase incentives for project developers. The reductions realised in 2013 will not be used for meeting emission reduction requirements of any contract with the Swiss government but are seen as a voluntary contribution of the CCF to abatement.
14. PPP corrected values lie somewhat lower at €37.0 for GDP PPP; interestingly, biomass-based district heating is not considered in this study and also not in the less detailed study on Switzerland, McKinsey 2009b.
15. This is unlikely to be possible, but the legal status of these post-2012 reductions is not yet settled. In case these credits can be sold, double-selling may occur, as the CCF already covers a part of the additional costs that are larger than the share of reductions realised until 2012.